As Puerto Rican banks consolidate, problems persist
Thu Apr 29, 2010 1:49pm EDT
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SAN JUAN, April 29 (Reuters) - An imminent consolidation of local banks will help Puerto Rico's banking industry, but won't be a quick fix for the U.S. commonwealth's battered finance sector, government and industry officials say.

Financials

Three banks operating under Federal Deposit Insurance Corp. cease and desist orders -- Westernbank, R-G Premier Bank and Eurobank -- are expected to disappear after being auctioned off possibly as early as Friday.

Puerto Rico's largest bank, Banco Popular, as well as Doral Bank [DRLBK.UL] (DRL.N) and Oriental Financial Corp., have raised some $1.8 billion in recent weeks to participate in the consolidation.

Meanwhile, the three small banks threatened with foreclosure have been scrambling to raise cash to comply with FDIC capital requirements, according to local press reports.

The 11 commercial banks operating on the Caribbean island lost $567.41 million last year, according to the Office of the Puerto Rico Financial Institutions Commissioner. The banks ended 2009 with total assets of $89.6 billion, down from $95.9 billion the year before and a high of $101.5 billion in 2005.

Puerto Rico, a U.S. commonwealth with nearly 4 million residents, suffers from chronically high unemployment and has been dogged by recession since 2006.

"To the extent we are dealing with the weakest links, it will be positive. This clearly has to happen. It has to help," said Sergio Marxuach, policy director at the Center for the New Economy, an island think-tank.

"The banking system will remain weak. The rest of the banks still have significant issues with non-performing loans, largely construction loans. What we will see is a gradual writing down of these assets over time. That will lead to a significant repricing of real estate."

The sector shakeout will be time consuming, Marxuach said. "Right now, the banks are not contributing economic growth because they are too weak to lend, and the government is not contributing because they are cutting spending," he said.

Puerto Rico Governor Luis Fortuno's administration has been meeting White House and U.S. Treasury Department officials for more than a year seeking funding to help bolster the island banking system, but the talks have never yielded a concrete plan.

The local government has tried to spark increased business lending by tapping into a $500 million economic stimulus package it created to provide guarantees for commercial banks to lend to small and medium-sized businesses, but the guarantee program has yet to take off.

The Puerto Rico Planning Board said last month it expected the island's economy to contract by 3.6 percent during the current fiscal year, versus previous predictions of mild growth of from 0.1 percent to 0.7 percent. It predicts 0.4 percent growth for the next fiscal year beginning 2011. (Reporting by Reuters in San Juan, writing by Michael Connor in Miami; Editing by Leslie Adler)

http://www.reuters.com/article/idUSN2922269220100429